Click the Study Aids tab at the bottom of the book to access your Study Aids (usually practice quizzes and flash cards).
Study Pass is our latest digital product that lets you take notes, highlight important sections of the text using different colors, create "tags" or labels to filter your notes and highlights, and print so you can study offline. Study Pass also includes interactive study aids, such as flash cards and quizzes.
Highlighting and Taking Notes:
If you've purchased the All Access Pass or Study Pass, in the online reader, click and drag your mouse to highlight text. When you do a small button appears – simply click on it! From there, you can select a highlight color, add notes, add tags, or any combination.
If you've purchased the All Access Pass, you can print each chapter by clicking on the Downloads tab. If you have Study Pass, click on the print icon within Study View to print out your notes and highlighted sections.
To search, use the text box at the bottom of the book. Click a search result to be taken to that chapter or section of the book (note you may need to scroll down to get to the result).
View Full Student FAQs
5.2 Incidence of Taxes
- Who bears the largest burden of a tax-buyers or sellers?
How much does the quantity fall when a tax is imposed? How much does the buyer’s price rise and the price to the seller fall? The elasticities of supply and demand can be used to answer this question. To do so, we consider a percentage tax t and employ the methodology introduced in Chapter 2 "Supply and Demand", assuming constant elasticity of both demand and supply. Let the equilibrium price to the seller be ps and the equilibrium price to the buyer be pb. As before, we will denote the demand function by qd(p) = ap-ε and supply function by qs(p) = bpη. These prices are distinct because of the tax, and the tax determines the difference:pb = (1 + t)ps.
This solves for
Recall the approximation
Thus, a small proportional tax increases the price to the buyer by approximately and decreases the price to the seller by The quantity falls by approximately Thus, the price effect is mostly on the “relatively inelastic party.” If demand is inelastic, ε is small; then the price decrease to the seller will be small and the price increase to the buyer will be close to the entire tax. Similarly, if demand is very elastic, ε is very large, and the price increase to the buyer will be small and the price decrease to the seller will be close to the entire tax.
We can rewrite the quantity change as Thus, the effect of a tax on quantity is small if either the demand or the supply is inelastic. To minimize the distortion in quantity, it is useful to impose taxes on goods that either have inelastic demand or inelastic supply.
For example, cigarettes are a product with very inelastic demand and moderately elastic supply. Thus, a tax increase will generally increase the price by almost the entire amount of the tax. In contrast, travel tends to have relatively elastic demand, so taxes on travel—airport, hotel, and rental car taxes—tend not to increase the final prices so much but have large quantity distortions.
- A small proportional tax t increases the price to the buyer by approximately and decreases the price to the seller by The quantity falls by approximately
- The price effect is mostly on the “relatively inelastic party.”
- The effect of a tax on quantity is small if either the demand or the supply is inelastic. To minimize the distortion in quantity, it is useful to impose taxes on goods that either have inelastic demand or inelastic supply.
- For the case of constant elasticity (of both supply and demand), what tax rate maximizes the government’s revenue? How does the revenue-maximizing tax rate change when demand becomes more inelastic?